Russian Central Bank Cuts Rates, Says Economic Recovery ‘Imminent’

Russia's central bank cut its main lending rate on Friday for the first time in almost a year, signaling confidence that inflation risks are declining and describing an economic recovery as "imminent."

The rate cut comes at a time when Russia's economy, plagued in the past few years by plunging oil prices and Western sanctions over the Ukraine crisis, is now showing signs that the worst is behind it.

The bank cut the rate by a half-point to 10.5 percent, the first cut since July 2015, an outcome predicted by a majority of analysts, although some had expected no change.

After declining by 3.7 percent last year, the economy now looks set to begin growing again, helped by an unexpectedly strong rebound in global oil prices and a plunge in inflation that is helping to shore up living standards.

Explaining its decision, the bank said it "notes the positive trends of more stable inflation, decreased inflation expectations and inflation risks against the backdrop of imminent growth recovery in the economy."

The bank also said it "will consider the possibility of a further cut based on estimates for inflation risks and alignment of inflation decline with the forecast trajectory."

The ruble strengthened after the decision, an unusual response as lower interest rates normally make a currency less attractive to hold. But this factor appeared to be outweighed by the positive signals the central bank sent about the health of Russia's economy more generally.

"The market has interpreted the decision of the central bank positively," said Sergey Romanchuk, head of forex and money markets at Metallinvestbank. "The central bank is conservative and if even it has decided to lower rates in the current situation, it means its evaluation of the prospects for economic growth and lower inflation are quite reliable."

The rate cut and unusually bullish rhetoric from the central bank testify to the improvement in Russia's economic prospects over recent months as commodity prices rally and geopolitical tensions ease.

Brent crude, an international benchmark for Russia's main export, has recently hit eight-month highs above $50 per barrel, recovering more quickly than expected from a 13-year low of $27 per barrel in January.

Although Russia remains under Western sanctions, with little expectation they will be lifted in the coming months, there are also indications geopolitical tensions are diminishing. Italian Prime Minister Matteo Renzi and European Commission head Jean-Claude Juncker will visit an economic summit in St. Petersburg next week in a tentative sign that European leaders may be keen to rebuild bridges to Russia.